Why a double-dip recession is looking increasingly likely


2:12 pm - April 19th 2011

by Duncan Weldon    


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Over the past few weeks I’ve become very worried about the state of the British, and indeed world, economy. So worried in fact that I’ve changed my central view.

I used to think that we would experience a period of sluggish growth with a downside chance of an actual double dip, but now expect a double dip with sluggish growth as the most likely upside scenario.

I’m writing this a week and a half before we get the first look at the Q1 2011 growth figures, but I’m more concerned about figures later in the year. For me to change my view again, I’d have to see very strong figures next week. Something which looks unlikely.

Whilst there has always been a real worry about growth in 2011, I’ve until now been reluctant to suggest that a second downturn is likely.

For me the final piece of the jigsaw making me change my view came last week with the juxtaposition of the inflation and retail sales numbers on the same day. Inflation unexpectedly fell driven by grocers cutting costs but retail sales (despite price drops) suffered their worst fall since the records began.

I’m getting what can only be described as a ‘mid 2008 feeling’ – financial market troubles (this time mainly in the Euro area rather than directly in the banks), soaring commodity prices, signs of stress in the real economy and what can only be described as complacency in the forecasting community.

Back in mid 2008 the consensus view (held by most city analysts, the BCC, the CBI, OECD, EU,* etc, etc) was that the UK would avoid a recession. We now know it had actually already started.

For the Office of Budget Responsibility predictions to be more right (in predicting growth) than wrong, four nearly impossible things have to happen.

1 – The impact of spending cuts on growth has to be a lot lower than the IMF estimate them to be.

2 – We have to experience very fast export growth (despite our major trading partner, the EU, being wracked by problems and austerity) and, at the same time, historically slow import growth.

3 – We need a mid/late 1990s style investment boom. Something that is not happening yet.

4 – The household savings ratio has to fall and households having to starting borrowing and spending again.

Whilst one or two of these things might happen, I just don’t see them all occurring. And that means that by Q2/Q3 the economy could be serious trouble. Again.

Does this mean we should forget about the deficit and concentrate entirely on growth? No – that is a false choice as growth is a hugely important factor in deficit reduction. But it does mean the path of deficit reduction that Osborne is trying should be re-thought.

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About the author
Duncan is a regular contributor. He has worked as an economist at the Bank of England, in fund management and at the Labour Party. He is a Senior Policy Officer at the TUC’s Economic and Social Affairs Department.
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Reader comments


Duncan, you may or may not be right on the double-dip. However, either way, the economy is unlikely to slump continuously until 2015. Ergo, this is an argument we cannot win. As it says in the piece, am not sure why LC seems to be discounting in that we will be ultimately proved right on this argument…IMHO we are damned either way.

2. Duncan Weldon

Rob,

Original ending to my post at my blog:

“Whilst one or two of these things might happen, I just don’t see them all occurring. And that means that by Q2/Q3 the economy could be serious trouble.

Again.

Does this mean we should forget about the deficit and concentrate entirely on growth? No– and anyway that is something of a false choice as growth is a hugely important factor in deficit reduction. But it does suggest to me that the excessive front loading of deficit reduction that Osborne is trying should be rethought. I’m increasingly drawn to the Deficit Reduction Averaging approach suggested by Adam Lent and Tony Dolphin, but of course that would mean moving more of the pain back from 2011 and 2012 and into 2013 and 2014, dangerously close to an election from the government’s point of view.”

But more importantly – i don’t mean this as a political point, simply a bit of economic analysis.

And whilst we are highly unlikely to be in a slump in 2015 – lots of what is happening now is eerily familar to long time watchers of Japan such as the MPC’s Adam Posen or Richard Koo.

Interesting. Actually I don’t fault you on the economics, a double-dip is perfectly plausible. My guess would be that Osborne will finally see it happening in time to pull it out of the fire, and make a an “adjustment” (i.e. last-ditch dash for growth which will lead to a gradual recovery just in time for 2015). Also would argue the perhaps more esoteric point that Japan had serious structural and political problems which didn’t help during the 90s and I think the UK’s a bit more fundamentally robust. But yes, I buy the scenario as a possibility and perhaps a strong one.

The problem, of course, is the politics, which is what my article focuses on. We on the left (especially one E. Balls!) are arguing everything from a pure economics point of view, and being mostly correct as to the solutions: but then losing the political argument. As Alex Smith points out today on LabourList, we have not made the argument in defence of ourselves strongly enough for the first year of the coalition. Which means it’s difficult to make it, ex post, and be believed.

While I can see that the difference between sluggish growth in 2011/12 and a technical double dip recession may make little difference economically. The damage to Osborne will be political.
The polling figures suggest that confidence in him is low already, if he manages to crash (what appeared to be) a growing economy in 2010 straight back into a double dip, he will be in the same league as Norman “Price worth paying” Lamont.
Incompetence is already a tag that is sticking to the Coalition, a double dip would rip their credibility to shreds. Trouble for Cameron and Osborne is that another high profile U-turn will be nearly as bad.

Rob, I’m not convinced the political problem will be quite like how you envisage it.

As Alex Smith points out today on LabourList, we have not made the argument in defence of ourselves strongly enough for the first year of the coalition. Which means it’s difficult to make it, ex post, and be believed.

Not so quick. It depends on why you think the public lost faith. And sometimes, its not just about the deficit but general lack of trust. The Coalition’s numbers on the economy and how much people trust them arent so great either.

But this is all a political debate. The economic debate is above, but that also matters. If the economy remains stagnant, Osborne won’t be able to carry on claiming that it is all Labour’s fault – he has been saying for ages that he also believes in growth.

Sunny,

You make a good point, that the public might not trust the Tories either. But this then becomes a lowest-common-denominator debate about who the public trusts least – sadly, I still think that’ll still be us.

Where I think we agree is that there’s a vital political debate. Where we disagree, I think, is how much the economics matters at this point. As long as the recovery pokes its nose out before 2015, I think the public will give the Tories the benefit of the doubt.

I think we should take a long-term wager on this: a tenner is yours if we have better economic polling than the Tories in the short campaign for the 2015 general…! (No more, I’m from Yorkshire you know.)

7. Charles Wheeler

“Whilst there has always been a real worry about growth in 2011, I’ve until now been reluctant to suggest that a second downturn is likely.”

Anyone that accepts the premise of ‘expansionary austerity’ can’t really expect to be taken seriously.

Look beyond the trees of your quarterly figures to the trees of 30 years of growing inequality and the attendant growth in private debt. It’s not possible that shrinking incomes and rising debt repayments can sustain growth as government spending is cut. It’s just one big Ponzi scheme.

I think the experiences of Greece, Ireland, Portugal and recently the US shows that while we may disagree with what Osborne proposes to cut, he had little choice but to make the cuts. Britain simply cannot afford the markets to doubt our ability to repay the huge amounts of money we will be borrowing over the coming years.

If that causes a slight double-dip then I don’t see it as much of a problem. The important part is whether we can get away from government spending as the main driver of our growth and towards more private growth. With strong growth in private sector employment in the latest figures, it looks like we may get there. Lots of risks still on the way though.

Pretty weak Duncan to base your opinion on a fall in retail sales. Did you not consider that the fall was distorted by the Easter effect? The annual changes was within the recent range if you allow for a later Easter. Most of the fall in CPI from 4.4% to 4% was food and airfares ( Easter )

I agree that growth will be sluggish for the rest of the year. However, I can’t see where you get a double dip recession from known indicators. Services and manufacturing PMI are all showing growth. Vacancies are up. The labour market continues to be better than expected. Total hours worked has recovered half of the loss since the lows of 2009, and the trend is rising. Export volumes are rising and imports down, which will mean trade will boost Q1 GDP growth. Business investment is rising albeit not fast enough to put a serious dent in unemployment. There has been some decline in risk appetite and widening of spreads. However, the bond market is not indicating another recession and I’ve never known one to occur that was not predicted by bond yields.

There are plenty of headwinds and the eurozone is a running sore. However, I will stick to about 0.5% below trend growth for this year rather than a double dip recession. The government are just not taking enough demand out of the economy at the moment to have a serious negative impact. However, they do influence expectations and every time one of them opens their mouth everything heads south.

Compare this HM Treasury survey at March 2011 of independent forecasts for the UK economy:
http://www.hm-treasury.gov.uk/d/201103forecomp.pdf

The survey covers some two dozen or so new forecasts made by City and non-City forecasting groups. The average of the surveyed forecasts for this year shows weak growth but there is no hint of a double-dip recession in the latest survey and stronger growth is forecast for next year.

IMO it’s worth keeping a regular check on this monthly survey through this link:
http://www.hm-treasury.gov.uk/data_forecasts_index.htm

The National Institute of Economic and Social Research (NIESR) is a highly respected think-tank which produces regular forecasts of the UK economy as well as much else by way of analysis of policy and topical issues. It’s most recent forecast was released a couple of weeks ago for 6 April.

This was the Reuters report of that forecast:
http://uk.reuters.com/article/2011/04/06/uk-economy-grew-idUKTRE7353LX20110406

I pick out the Reuters report to quote because in the context of the market served by the Reuters agency, it has to maintain a reputation for political neutrality.

11. Duncan Weldon

Richard @9.

It’s not based on the retail figures (and even excluding an Easter effect they were dreadful). I get a double-dip as I don’t see all the four nearly-impossible things happening

Bob @10,

I know the call its out of consensus – I accept that.

Take a look at the June 2008 forecasts:

http://webarchive.nationalarchives.gov.uk/20100407010852/http://www.hm-treasury.gov.uk/d/200806forcomp.pdf

Only one forecaster saying a drop in output in 2009.

12. Lisa Ansell

1 – The impact of spending cuts on growth has to be a lot lower than the IMF estimate them to be.

Round here several things have happened, and the cuts have begun to bite. Because the majority of fixed and low income spending is spent in the local economy, rather than outside- early benefit cuts and fears over jobs(cuts started over 2 years ago here, and since then there has been a successive squeeze on pub/third/voluntarysector funding) had already caused a drop in demand that was exacerbated by Winter.

Now as the main body of jobs begin to be lost local traders including markets have been really hard hit. The effect of the local authority cuts has already meant that contracts have been cancelled. Petrol and food prices have also gone up.
The approval of planning permission for a two new supermarkets locally is basically the last straw for our local market and many traders are not sure they will be there by end of year.

Trading is v slow in small businesses, my friends taxi company is basically running week to week and is struggling to keep going. Shops are closing or quiet, and pubs and restaurants are not doing great. We have had some improvement with tourism but the final benefit cuts hit last week and that caused a massive drop off. The impact of spending cuts has already been quite great here, and unlikely to improve.

2-The household savings ratio has to fall and households having to starting borrowing and spending again.

The problem with this is, and has always been- the refusal of any party to fully discuss the implications of our debt bubble. It now sits at 3 or 4 times our GDP(sorry didnt have time to google)- I dont think the problem is just that people are not borrowing, or banks arent lending. People are maxed out. Credit has been masking the difference between low wages and cost of living for a while, I am not sure how we could look at how much we owe as a nation, and the how much is generated in wages, and it not occur to us that actually people are up to their eyes in debt.

While I would like to entertain the ‘labour would be better blah blah’ discussion- I am not sure how that is possible. Unless we are suggesting that Labour cutting would have had different effects? Would be interested in how.

13. Lisa Ansell

Forgot to say- good article

@11 Duncan,

Just compare the links @10 to the Treasury’s recent monthly survey of independent forecasts and the Reuters report of the latest NIESR forecast published on 6 April. Most converge on anticipating weak GDP growth this year but stronger growth next.

There are inevitable concerns about cuts in public spending and jobs which have barely started as yet – most folk don’t seem to appreciate that. It is certainly prudent, as I’ve often posted, to consider whether net exports, business spending on investment and consumer spending will rise sufficiently to fill the gap in aggregate demand left from the cuts in public spending. For what it’s worth, the forecasting pundits are not currently saying there is likely to be a double-dip recession. But:

A warning by the Bank of England about the fragile state of consumer spending led to a sharp fall in the pound as the City pushed back its forecast for an increase in interest rates until late this year. [20 April]
http://www.guardian.co.uk/business/2011/apr/20/bank-of-england-warns-of-fragile-consumer-spending


Reactions: Twitter, blogs
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  2. Rick

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  3. Aaron Peters

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  5. sunny hundal

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  6. Duncan Weldon

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  9. Ceehaitch

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  10. Rob Marchant

    Rather interesting debate going on over at @libcon about politics vs economics and whether Labour's got it right or not http://bit.ly/dMh3jA

  11. How should I vote on AV? « Left Outside

    […] that I think Duncan is correct and the Tories are driving the economy into the floor and I think Sunny is correct and the Tories […]

  12. Rich

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  20. Is it tactically wise for Osborne’s critics to predict a recession? | Liberal Conspiracy

    […] to predict a recession? by Chris Dillow     April 20, 2011 at 4:33 pm Duncan Weldon is forecasting a “double dip” recession. I’m not sure this is […]

  21. A Double Dip Recession May Be Inevitable « News You May Have Missed

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  22. Throw the old rule books out of the window | Liberal Conspiracy

    […] Throw the old rule books out of the window by Sunny Hundal     December 1, 2011 at 10:02 am I doesn’t need repeating that bloggers at Liberal Conspiracy (and elsewhere on the left) have been saying for years that massive cuts to public spending during the deepest recession in 80 years was a manifestly idiotic idea. In April, Duncan Weldon even went as far as predicting a double-dip recession. […]

  23. sunny hundal

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  24. Steve

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  29. Gordy Allan

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  30. Owen Blacker

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  31. Graham Jeffery

    http://liberalconspiracy.org/2011/04/19/why-a-double-dip-recession-is-looking-increasingly-likely/

  32. sunny hundal

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  34. PeterJukes

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  35. Ross Houston

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  36. Foxy52

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  37. McGinOxford

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